Those who spread fear of the future (...should the other party be in charge, of course) like to use the word “bankruptcy” in their talking points about the federal government’s finances. Why? Because that word is a real attention-grabber. Both sides have tossed that word out at one time or another during their stump speeches and fund-raising events, invariably to describe what the other party has done, is doing, and will do to the country’s finances. Medicare will be bankrupt; the baby boomers will bankrupt social security; the USA will be bankrupt in ten years; we're bankrupting our grandchildren; the USA is already bankrupt.
Sound familiar? That word has become almost as overused as "groovy" was back in the '60s (...although I personally preferred "far out").
But using the word “bankruptcy” is just a rhetorical scare tactic (...unless the person using it really does not understand monetary economics, in which case it's just plain ignorance—which, fortunately, is fixable). The reason is quite simple: In any scenario short of hyperinflation, it is impossible for the federal government of the USA to become incapable of paying its obligations in money backed by the federal government of the USA. (Reread that sentence.) The word “bankruptcy” should be a red flag to listeners whenever anyone uses it to describe our federal government’s finances.
But what about the Weimar Republic?
Well, that was hyperinflation, which is the monetary equivalent of the big no-no in computer programming: dividing by zero. (When a dollar buys one loaf of bread, the price of a loaf of bread is $1 ÷ 1 loaf, or one dollar; but when a dollar buys zero loaves of bread, the price of a loaf of bread is $1 ÷ 0 loaves, or infinity dollars—and not even the federal government can print that many.) Hyperinflation is not the result of a government “running out” of money; it is the result of that government allowing way, way too much of it to be created.
Again: It is impossible for the federal government to run out of its own money, but it is not impossible for it to create hyperinflation. So why don’t the politicians, journalists, and so-called policy wonks use the word “hyperinflation” in place of the word “bankruptcy” in their stump speeches, fund-raisers, and talking points? Bankruptcy is not possible, hyperinflation is; why don’t they just call a spade a spade? Do they not understand monetary economics? Or are they being dishonest because of some hidden agenda? (In either case, we have a big problem that needs correcting.)
Next time we hear anyone warning us of impending “bankruptcy,” let’s interrupt and ask, “Wait, don’t you mean ‘hyperinflation’ instead of ‘bankruptcy’?” I’ve often wondered why our so-called economics correspondents never ask that question. It’s time someone started, don't you agree?
Two-part Hyperinflation Quiz
Now that we know federal government bankruptcy is impossible, we can shift our sights to the one true monetary black-hole-to-be-avoided, hyperinflation. What would cause it (...deficits maybe?), and what is the supporting historical evidence? What would prevent it (...surpluses, maybe?), and how do we know? What are the signals? How accurately do we measure inflation? How far ahead of time can we tell it’s getting out of hand? Those are important questions, which I’ll address in future articles (...not that I know all the answers; I just know a lot of the questions, and that several of the answers do not support conventional wisdom).
For now, here’s a two-part brain-teaser about avoiding hyperinflation.
Part 1: Spot the flaw in Joe’s logic
Joe had a deathly fear of being killed by heat stroke. His research revealed that his chances of getting heat stroke were highest at the equator, and lowest at the north pole. Joe concluded that he should move to the north pole, to minimize his chances of death by heat stroke.
Part 2: Spot the flaw in Sam’s logic
Joe had an uncle named Sam, who had a deathly fear of being killed by hyperinflation. Uncle Sam’s research revealed that the chances of triggering hyperinflation were highest when too much money is created in the economy, and lowest when little or no extra money creation is allowed. Uncle Sam concluded that he should dampen, discourage, or even prevent the creation of extra money in the economy, to minimize his chances of death by hyperinflation.
[Note: Identifying the logic flaw in Part 1 should be easy. For a hint about how to identify the logic flaw in Part 2, see this first article in a series about money.]